How funding can be used to expand your business

Weight of expectation: an injection of funds can ramp up a businessCredit:
Getty

13 September 2016 • 9:30am

Expanding a business is never easy, but receiving substantial funding can make a huge difference.

Any firm that has tried to expand will tell you that it is tricky business. Securing sufficient funds to recruit more staff and open more retail locations can be tough when you're the new kid on the block.

Katie Hope looks at the difference an injection of funds can make.

We talk to three businesses about how they've managed to overcome these obstacles.

Xercise4Less

When Jon Wright opened his first budget gym chain Xercise4Less in 2009, the potential was immediately obvious.

The ex-rugby player had converted the site from a traditional health club he'd owned for three years but which he had struggled to make succeed.

However, the ‘budget’ club idea – charging as little as £10 a month for membership - worked immediately.

"I could see the opportunity and I wanted to maximise it," says Mr Wright.

But in 2009 at the height of the financial crisis, getting funding to open more gyms was "nigh on impossible," he explains, adding that “fundraising for a new business is difficult when you’ve got no track record.”

We wouldn't have done that without the BGF as a shareholder. They gave us credibility

The approach he chose was to use the business’s cashflow to fund new gyms. Because members paid monthly by direct debit, Mr Wright had an accurate sales forecast and ran discount offers to generate more cash.

It may have seemed like a good idea, but the promotions reduced the firm’s profit. It also made it harder to deal with unexpected costs and meant that on occasion contractors were paid late. Progress was slow and the business opened just three gyms in its first three years.

It was only in 2013, once it secured £5m funding from the bank-backed investor BGF (Business Growth Fund) that expansion ramped up.

By the end of the year, Xercise4Less expects to have 50 gyms and is on track for £40m in annual revenues, with earnings of about £9m

BGF has now invested £19.7m in the group, and Xercise4Less has also been able to secure significant additional bank debt.

"We wouldn't have done that without the BGF as a shareholder. They gave us credibility," Mr Wright says.

The Coaching Inn Group

The business started out as a pub group. But in 2007, founder and chief executive Kevin Charity, decided to sell off the pubs business because it was growing too slowly and the group, which included a 10-pin bowling alley and a gastro pub, had become too diverse.

Instead, Mr Charity decided to focus on coaching inns, attracted by the additional revenue stream of rooms on top of food and drinks.

He initially used the funds from the pub group sale and group profits to start the business, but because he was buying freehold properties and had to spend a lot of money on refurbishment, progress was much slower than he wanted. Lack of capital also meant they lost out on properties to rivals with ready cash.

I've been able to make direct approaches to existing businesses, which I couldn't do before because I didn't have the funds

"We had to do it piecemeal and it was frustrating," he said.

The firm's solution was to bring in a finance director Edward Walsh, the boss of the investment firm Commer Group, to help raise the necessary capital.

Mr Walsh not only joined, but also took a 20 per cent stake in the business. He also helped the firm secure a £4.5m deal with BGF to help support its £20m expansion and its ambitious aim to double the number of properties in its portfolio over three to four years.

The firm is now on track to have 15 sites by the end of this month, and reported a 60pc rise in profits to more than £13m for the year to March.

"Having the correct amount of capital means I can focus on the business and has enabled me to make bolder decisions," Mr Charity says. “I've been able to make direct approaches to existing businesses, which I couldn't do before because I didn't have the funds.”

Crucially he says it's also made running the business far more pleasurable. "Instead of worrying about surviving day to day, I can plan better.”

Cass Art

Independent art materials supplier Cass Art started out in 1984 as a single shop close to London's National Gallery, while founder Mark Cass focused on other ventures, largely in New York. It was only when he returned to London in 2001 that he decided to expand.

Funded from his savings and the shop's profits, he opened more shops in London, averaging one new shop every two years until he had five.

By then he needed more money and it was obvious there was a demand for the art shops beyond the capital, with many art students and artists living in big cities outside such as Glasgow and Bristol.

The deal with the BGF has helped me de-risk the venture and build a professional retail team

Mr Cass realised to move forward at the pace he wanted to, the investment needed was "huge" and so he decided for the first time to seek external funding for the business.

Mr Cass chose BGF mainly because of the access to experienced retailers it gave him. In 2013, as well as providing £3.2m in funding, as part of the deal, Stuart Rose, the former chairman of toy group Hamleys and the ex-managing director and deputy chairman of The Body Shop, joined as chairman.

Since then the firm, which is about to open its twelfth shop in Manchester, has doubled in size and started a website which is now its biggest shop.

"If I'd done it with my own money it would have taken too long. The deal with the BGF has helped me de-risk the venture and build a professional retail team."